Q: Should I be worried that House Republicans may try to reduce the tax benefits of saving in a 401(k) plan?

Q: Should I be worried that House Republicans may try to reduce the tax benefits of saving in a 401(k) plan?

A: Let’s first discuss the motivation: to offset totally unnecessary tax cuts to the very, very wealthy. Ok, additional context: While many Americans do not have access to a 401(k) plan (they don’t have a job, their employer does not offer it, they don’t qualify because they work part time, etc.), millions of Americans do participate in such plans. With a 401(k) plan, you can contribute money on a pre-tax basis now (pay no tax upfront), but you do pay tax later when you withdraw the money.

What some House Republicans have suggested is lowering the 401(k) maximum annual contribution amount from its current level of $18,000/year to as low as $2,400/year, impacting anyone who currently contributes more than $2,400. Who is that? Mainly middle and high income people (see chart above).

So, what to conclude? This is an effective tax increase that mainly hits middle and upper income Americans, to benefit the extremely wealthy. While our current system is less-than-ideal, reducing incentives to save is unhelpful when most Americans (of all income levels) don’t have enough saved for retirement. And access to saving via payroll deductions helps people actually save. House Republicans, you can go pound sand!

Stephanie’s public service announcement: if you have a retirement plan at your job, use it if you can at all afford it, and if you can get an employer match, that’s doubling your money for freeeeeeee! If you get a raise at the end of the year, you can “bank” your raise (set aside the increase in income) and “pay yourself first.” And remember what Albert Einstein said: “Compound interest is the most powerful force in the universe.”

- first published in the 10/23/2017 newsletter

Stephanie Lee